Interest Rates are Crashing Like They Did Right Before 2008…

Between August 2000 and April 2001, the stock market plummeted 25% while bond yields fell.

This stocks-down-yields-down environment typically signals economic recessions.

In fact, April 2001 marked the beginning of a recession, leading to another 40% market decline.

S&P 500 Index

This stocks-down-yields-down environment isn’t unique to the early 2000s.

When we fast forward to the global financial crisis, we see a similar story unfold:

Initial stock market drop coincided with falling yields.

Same recessionary behavior led straight into the 2008 recession

S&P 500

2024: History Repeating?

We’ve seen 2 substantial stock market declines in 2024, both accompanied by falling US yields.

This stocks-down-yields-down environment pattern hasn’t occurred since March 2020 – another recessionary period.

Many investors are concluding that the market is pricing in an economic downturn.

S&P 500

But here’s the catch: Bond yields often fall without signaling a recession. It’s important not to jump to conclusions based solely on this indicator.

10 - Year Treasury Yield

A Rare Market Confluence

Today, we’re seeing an extremely rare environment:

Bond yields falling aggressively
Oil prices dropping
US dollar weakening

All 3 of these powerful financial forces are moving in the same direction.

10-Year Treasury Yield

This combination a setup that has only occurred 9 times since 1980.

Each of these instances were very powerful signals for the stock market.

10-Year Treasury Yield

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How Do USD, Oil, and Yields Affect Stocks?

Let’s break down each factor:

1. Weakening US Dollar:

70% of S&P 500 company revenues come from the United States, whereas 30% comes from abroad.

Weaker dollar makes foreign revenues look bigger in dollar terms.

This boosts S&P 500 company earnings, driving stocks higher.

2. Falling Oil Prices:

Lower oil prices reduce costs for manufacturing, processing, and transportation, leading to increased profit margins for S&P 500 companies.

Falling oil prices also tend to lower gasoline prices at the pump.

This boosts consumer spending and drives up S&P 500 company revenues.

3. Lower Bond Yields:

Falling bond yields primarily impact the price-to-earnings (PE) ratio.

Yearly changes in S&P 500 PE ratio closely correlate with inverted bond yields.

Recent rise in market valuations (2023-2024) directly linked to falling bond yields.

So, lower bond yields boost market valuations.

Historical Perspective

Since 1982, every time the dollar, oil prices, and bond yields all fell together, the stock market went up during and after these periods.

This makes today’s environment look very constructive for stocks.

Short-Term Caution, Long-Term Opportunity

While the overall outlook is positive, it’s important to note that August and September are seasonally weak periods for the market. This explains the recent volatility we’ve seen.

We have actually been using this volatility to add some new names, including healthcare and utility stocks that have been performing incredibly well so far. We recently booked profits on NextEra Energy Inc. ($NEE) for a +17.3% gain.